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Audit excellence not enough for foreign investment – SA must fix education, health and labour

07 October 2014 Andrew Hannington, Grant Thornton

Global Competitiveness Index points to SA public sector failings.

Despite continuing its downward trend and falling a further three places to 56th place overall in the latest World Economic Forum’s (WEF) Global Competitiveness Index (GCI) for 2014-15, South Africa has maintained its number one position for its strength of auditing and reporting standards.

“While it’s heartening that we have managed to retain the top spot worldwide in this area for the past five consecutive years, the recently released WEF Global Competitiveness Report once again drives home the enormous dichotomy hampering the competitiveness of our nation,” says Andrew Hannington, CEO of Grant Thornton Johannesburg.

Once again, the Report highlights the fact that SA does well on many of the measures relating to the country’s private institutions and financial market development, but fares badly on aspects like health, education and labour market efficiency.

“These failings discourage foreign direct investment (FDI) and hinder SA’s long term economic growth and stability,” says Hannington. “Foreign investors have no interest in countries with uneducated, unproductive workforces and unreliable labour relations. Unfortunately these negatives are much more damaging to the country than the advantages of our superior auditing and reporting standards.”

The World Economic Forum’s (WEF) Global Competitiveness Report shows that South Africa has regressed over the past four years. The 2014 – 2015 Report examines the competitiveness landscape of 144 economies, providing insight into the drivers of their productivity and prosperity, and examines the various factors that enable economies to achieve sustained economic growth. The Report series remains the most comprehensive assessment of national competitiveness worldwide.

“It is depressing but predictable to see us dropping yet another three places in the index,” says Andrew Hannington.

SA now ranks 56th out of 144 countries. The country ranked 53rd (out of 148) last year, 52nd (out of 144) the year before and 50th (out of 142) for the 2011 – 2012 period.

Hannington points out that, by and large, it is the private sector that helps South Africa to remain competitive while the public sector continues to hold us back in the rankings.

The Report found the top five most problematic factors for doing business in South Africa were restrictive labour regulations (cited by approximately 20% of respondents), an inadequately educated workforce (approximately 17%), inefficient government bureaucracy (approximately 15%), corruption (11%) and an inadequate supply of infrastructure (approximately 10%).

“We really need to stimulate SA’s competitiveness and our economy if we are to live up to expectations of being the leading player in sub-Saharan Africa,” he says.

It is positive to note that SA still leads the pack worldwide when it comes to the strength of its auditing and reporting standards, as well as the regulation of securities exchanges.

“This is unsurprising – we are world class when it comes to our private financial institutions and markets,” says Hannington.

The only other areas in which the GCI ranked SA within the top twenty were:

• Effectiveness of anti-monopoly policy
• Efficiency of legal framework in settling disputes
• Efficiency of legal framework in challenging regulations
• Efficacy of corporate boards
• Protection of minority shareholders’ interests
• Strength of investor protection
• Quality of air transport infrastructure
• Extent of staff training
• Effect of taxation on incentives to work
• Availability of financial services
• Financing through local equity market
• Soundness of banks and
• Regulation of securities exchanges

In several areas that fall squarely within the public sector, SA plots last, or close to the bottom, of the rankings.

“We rank last (144th out of 144) on the quality of our math and science education,” says Hannington. “SA also has a dismal showing when it comes to several areas of health and primary education, the quality of our educational system (140) as well as labour market efficiency, where we also rank 144th when it comes to cooperation in labour-employer relations.”

We also rank in the bottom twenty for:

• Business costs of crime and violence
• Business impact of tuberculosis
• HIV prevalence
• Business impact of HIV/AIDS and
• Life expectancy.

“Only when we start to close the gap between a largely efficient, effective private sector and a generally dismal public sector can SA hope to become more competitive globally,” says Hannington.

The challenges around SA’s labour force need to be addressed urgently if they are not to constrain the future stability and growth of South Africa.

“We need to build, educate and cultivate a skilled and sustainable labour force while simultaneously creating sufficient long-term growth and employment opportunities,” says Hannington.

Hannington believes that South African business needs to work closely with government to try to solve the country’s deepening education crisis.

“Our critical skills shortage is worsening as our public education system continues to fail the nation and it is way past time that critical focused attention be given to this area,” he says, noting that SA universities and the country’s professional services firms deserve kudos for the time and effort spent lifting poor basic education levels to international standards. “Healthcare is another area in which drastic measures are needed.”

“Our problematic labour, health, education and security in a struggling emerging market environment, are certainly cause for worry and a turnaround strategy is now well overdue,” he concludes.

Sub-Saharan Africa

In contrast to South Africa, Sub-Saharan Africa as a whole registered impressive growth rates close to 5%.

According to the Report, although large regional variations remain in terms of competitiveness—ranging from Mauritius, now a solid 17 places ahead of the second-ranked South Africa, to the lowest ranked Guinea at 144th—efforts to strengthen the very basic requirements for long-term growth will be crucial for sustaining economic growth and making it more inclusive.

Only three sub-Saharan economies, Mauritius, South Africa and Rwanda (62nd) score in the top half of the rankings.

BRICS

South Africa is third among the BRICS economies. Up one position, China now ranks 28th and continues to lead the BRICS economies by a wide margin—well ahead of Russia (53rd), South Africa, Brazil (57th), and India (71st).

The top ranking countries this year, from one to five, were Switzerland, Singapore, the United States, Finland and Germany.

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